Coinbase IPO — Is It a Watershed Moment for Cryptocurrencies?
Coinbase’s maiden market listing has proved worthy of its anticipated hype. Shares of Coinbase debuted under the ticker of “COIN” and opened at $381 (52% higher than its reference price $250) on the Nasdaq exchange, rising as high as $429 in the initial minutes of trading. Stock price at day’s close was $328.28 (valuation at $85.7bn).
Amid a massive surge of investor sentiment, the valuation of Coinbase spurred over $100bn for a while, making it among the top 85 most valued companies in the United States. Bitcoin prices witnessed a swell commensurate to the listing too, hitting $64,747.51, its highest-ever price to-date.
The listing is being heralded as a major milestone for the crypto world. To them, Coinbase is like a casino which will enable normalisation of the ongoing crypto swell and bring it closer to wide scale regulatory acceptance.
All’s Fair in Crypto and IPO
A huge misnomer that has enveloped the Coinbase IPO event is the use of the word “IPO” in spite of the fact that it is not one. Coinbase has opted for a direct listing (as Class A Common Stock), where companies can float their existing shares. They neither issue new shares nor raise new capital and are less volatile compared to IPOs.
It’s a relatively newer option to go public that was availed by companies like Spotify, Slack, Palantir, Asana, Roblox etc. Coinbase’s choice for a direct listing is a curious one that is certain to impact its equity strategy going forward.
One reason could be the “reference price” of a direct listing that is determined by the market mechanism rather than investment bankers setting them in IPOs. The former is more in line with crypto’s open-access and transparent ethos. Another reason could be the less cumbersome process and onerous costs involved in a direct listing compared to an IPO.
The Business of Coinbase
The largest cryptocurrency exchange in the US (by volume), Coinbase was founded in 2012 by Brian Armstrong, a former engineer in Airbnb, and Fred Ehrsam, a trader at Goldman Sachs. It initially started as a wallet for Bitcoin and managed to raise $5m in funding in under a year. Back then, cryptocurrency was viewed with immense distrust and was widely rumoured as a means to cover illicit money.
So, how did the founders manage to pull it from those dark ages to the renaissance of an IPO? Well, in more ways than one, for sure! Coinbase’s most profitable business model began when it acted as a bank. It started storing crypto-assets in a vault-like digital fortress of its servers. It got insurance coverage and round-the-clock security to defend against any possible mathematical assaults.
Next strategy was to cultivate regulatory appeasement. Coinbase is famous for playing ball with authorities. It quickly managed to discard itself from the anti-establishment prejudice that most crypto-businesses were branded with. It has a dedicated compliance wing that keeps combing through the database transactions to spot laundering or illicit financing activities.
As per Forbes, Coinbase routinely flags to the IRS those traders who do 200 or more trades in a year involving more than $200,000 in proceeds. It’s also careful not to list privacy coins or coins like Tether due to the regulators’ strict attitude towards them.
But hold on, don’t be too quick to relish in the good-boy imagery. There is an exemption that Coinbase uses to disclaim scrutiny on transactions and accounts placed under “personal finances”. As long as you are an individual (and not a firm), you can store Bitcoins in a personal wallet that is exempt from KYC and anti-money laundering regulations. Today, Coinbase deals in over 50 different cryptocurrencies and is able to preserve its 43 million user base by carefully crafting an operation that relents both to the regulatory overlords and the crypto-anarchists alike.
Company Financials and Investment Risks
Coinbase is profitable. With a profit of $322m last year and an estimated $800m in the first quarter of 2021 already, it’s undoubtedly on an upward growth trajectory. This makes it a unicorn among tech unicorns (sigh) that have gone public in 2020. But the fact remains that Coinbase’s growth is in lockstep with Bitcoin’s growth which presents a picture of inherent volatility, especially if we were to witness a “crypto winter” anytime soon.
Most of the company’s income is gathered through the fees and commissions charged on crypto transactions. Coinbase’s fees are higher than its industry rivals like Binance but it is still favoured by users due to its higher regulatory compliance. In any case, such a high reliance (c. 85% this year and 96% last year) of revenue on transaction fees represents an asymmetrical business model which could do better with diversification.
Fun Fact: Binance will list a Coinbase Stock Token against the Binance USD stablecoin (BUSD). This means Coinbase users will be able to trade fractions of Coinbase stock listed on Nasdaq.
The crypto market is a largely competitive sphere. With each passing day, crypto exchanges are minimising margins and other costs in transactions to stay in the game. As per the Wall Street Journal, for every $100 of Bitcoin you buy, you end up paying an extra $3.5, $1.5 and $0.5 as transaction costs in Coinbase, Kraken and Bitstamp respectively. Admitted, that the current growth momentum is leading in the direction of zero transaction costs in the future like equity, the momentum isn’t fast enough for that to happen soon.
Another issue that has been plaguing Coinbase administrators are the greater downtimes noticed on the exchange during price volatility periods on crypto. Since traffic is on the rise, the site infrastructure is under increased pressure, prompting multiple outages and risking the security of assets. No crypto user wants another situation like Japan’s Mt. Gox and Canada’s QuadrigaCX, both exchanges that went bust due to security failures.
How Thrilling is the $100bn Valuation?
No doubt, it is a critical milestone for Coinbase to have reached that mark. But one has to admit that even with the consistent rise in revenues for the company over the last 12 months, it is miles from meeting the profit expectations that are baked into a fairly lofty valuation of $100bn.
Although crypto has given today’s financial conception a revolutionary turn, millions around the world are still unaware of its blaze. At least 66% of American adults are reportedly “not interested” in crypto and 18% have “never heard of it”. Nevertheless, with the ongoing bullishness in the crypto market, one never knows.
Brian Armstrong has said that,
"Coinbase IPO will do for cryptocurrencies what Google’s IPO did for the internet."
The idea of bringing crypto from the fringes of finance to an acceptable market instrument becomes one step closer to reality today.
(Originally published April 15th 2021 in transfin.in)
